$8.5 Billion Mortgage Settlement Sent Back To New York Court

A U.S. appeals court ruled that a proposed $8.5 billion settlement by Bank of America Corp. with investors in mortgage-backed securities should be reviewed in New York state court, not federal court. Bank of America, the nation’s second largest bank, is seeking to resolve liabilities from its purchase of Countrywide Financial Corp. in 2008. The settlement has been viewed as a template for other banks to address claims by investors who bought risky pools of mortgages before the housing market collapsed. The ruling by the U.S. Court of Appeals for the Second Circuit reverses an October decision by U.S. District Judge William Pauley who had taken the case from state court.

Chief Judge Dennis Jacobs of the 2nd Circuit wrote in the decision that the case was being dismissed for lack of jurisdiction. The judges said it was up to the state court to confirm whether BNY Mellon had the authority to enter into the settlement, and acted reasonably and in good faith, as the trustee requested. The decision made it clear that the relief sought in this case was an issue for the New York state courts.

Bank of New York Mellon, which made the deal with 22 institutional investors, including BlackRock Inc. and MetLife, sought approval in New York State Supreme Court. Other investors, led by a group called Walnut Place LLC, which was not part of settlement talks but would be bound by the terms, complained the $8.5 billion payout was too low and sought Manhattan federal court as the venue for the proceedings. Walnut Place is a name used by Baupost Group, a Boston-based hedge fund run by Seth Klarman.

Gibbs & Bruns, the Houston, Texas, law firm that negotiated the Bank of America deal for institutional investors, also has sent demands for investigations of mortgage-backed securities sponsored by JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. If the settlement is ultimately approved, it could possibly set the stage for other institutions to resolve claims.